ATLANTIC RESORT DEVELOPMENT v. CURRAN MANAGEMENT SERVICES INC (2021)

MEMORANDUM AND ORDER PURSUANT TO RULE 23.0

Defendant William Curran appeals, after remand,³ from an amended judgment that awarded damages against Curran, individually, in the amount of $1,054,012.62, and included an order allowing Atlantic Resort Development, L.P.’s (Atlantic Resort), emergency motion for relief from judgment. We affirm.

1. Background. As described in our prior unpublished opinion pursuant to rule 1:28, at all relevant times, Curran owned ninety percent of Curran Management Services, Inc. (Curran Management) and was its president as well as one of its two directors. Curran Management was closed permanently at the end of 2010 for financial reasons. Curran is also the sole owner of InnSeason Management, Inc. (InnSeason), and is its president as well as one of its two directors. Curran used InnSeason as a central funding agent for the various other companies he controlled, including Curran Management, and “at his direction,” assets and liabilities could be moved between those companies.

Plaintiff Atlantic Resort obtained a judgment against Curran Management in the amount of $1,054,012.62, including prejudgment interest. Curran Management never paid the judgment, and Atlantic Resort brought this action against Curran, Curran Management, and InnSeason to collect on the judgment. As described in the prior appeal, “[t]he judge concluded that InnSeason was the successor of Curran Management and thus liable for the underlying judgment. The judge also concluded that this remedy at law prevented Atlantic Resort from prevailing on its equitable claims against Curran,” specifically, a claim seeking the equitable remedy of piercing the corporate veil in order to hold Curran personally liable. See Atlantic Resort Dev., L.P. vs. InnSeason Mgt., Inc., Mass. App. Ct., No. 18-P-0985, slip op. at 4 (May 10, 2019) (Atlantic Resort Dev. I). We noted that “[f]ollowing the April 10, 2018 entry of judgment, however, Atlantic Resort learned that (1) [InnSeason] previously had guaranteed $40 million in loans from Resorts Funding, LLC [Resorts Funding] to various companies controlled by Curran” -- this obligation having been recorded in a “Guaranty and Subordination Agreement” signed in conjunction with a “Third Amended and Restated Hypothecation Loan Agreement,” and reaffirmed in a “Fifth Ratification and Confirmation of Guaranty” signed in conjunction with a “Fifth Amended and Restated Hypothecation Loan Agreement” -- “and (2) the judgment against [InnSeason] caused it to be in default of that guaranty, and, thus, on May 22, 2018, [InnSeason] granted [Resorts Funding] a secured lien on all of [InnSeason]’s assets.” Id. This security interest was created and recorded in a “Security and Reaffirmation Agreement” (security agreement).

In the prior appeal, we affirmed the judgment imposing successor liability on InnSeason. We also addressed a cross appeal by Atlantic Resort, which, after judgment, had filed a motion to alter or amend the judgment in order to hold Curran personally liable following the imposition of the secured lien on InnSeason's assets. As we explained, “Atlantic Resort notes that the judge ruled that it did not succeed on its equitable claims against Curran because it had an adequate remedy at law against [InnSeason]. Atlantic Resort contends that once its remedy at law was no longer adequate due to the secured lien on all of [InnSeason]’s assets, the judge should have entered a judgment against Curran, individually.” Atlantic Resort Dev. I, Mass. App. Ct., No. 18-P-0985, slip op. at 7. We noted that Atlantic Resort had filed two emergency postjudgment motions on the grounds that the existence of the guaranty was not disclosed until after the judgment, and indeed, after the appeal period had passed. The first was a motion to file a late notice of appeal, the other was a motion to have the judgment amended. We observed that the judge had allowed the late notice of appeal on that basis, but denied without explanation Atlantic Resort's motion to have the judgment amended. We noted that, “[w]e are thus left to wonder why the judge denied that motion, where the same newly discovered evidence also had a direct bearing on the judge's sole stated reason for dismissing Atlantic Resort's claims to hold Curran personally liable” (footnote omitted). Id. at 9. We specifically concluded that Atlantic Resort had no adequate remedy at law due to its inability to collect on its judgment as a result of the secured lien. See id. at 9 n.12. In light of that, we remanded the case so that the judge “may reconsider the motion and properly explain his reasoning.” Id. at 9. We declined to determine the question of personal liability on appeal as the claims for such liability “involve[d] contested questions of fact which are best resolved by the trier of fact in the first instance.” Id. at 9 n.12.

2. Proceedings on remand. On remand, the judge reconsidered Atlantic Resort's motion to alter or amend the final judgment, concluding that “[u]pon further reflection, this court finds that the motion must ․ be allowed.”

The judge concluded that “the existence of the Third and Fifth ‘Amended and Restated Hypothecation Loan Agreements’ ․ between several Curran-related entities” and Resorts Funding, as well as the “grant of a secured interest in all of [InnSeason]’s assets to non-party Resort Funding, LLC pursuant to the ‘event of default’ caused by this court's issuance of a judgment of successor liability against [InnSeason],” which was recorded in the security agreement, amounted to newly discovered evidence. The judge found that the evidence was material to whether Atlantic Resort had an adequate remedy to collect its judgment against Curran Management from InnSeason, and concluded that Atlantic Resort had no adequate remedy at law as a result of these agreements.

The judge, therefore, turned to the merits of the veil-piercing claim he had not reached in his original decision. The judge weighed the twelve factors articulated by this court in Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 733 (1991). They are:

“(1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; [and] (12) use of the corporation in promoting fraud.”

The judge concluded that “Curran owned a myriad of interrelated companies, including [Curran Management] and [InnSeason], satisfying factor 1 [common ownership];” that he “[e]xerted pervasive control over [Curran Management] and [InnSeason], making decisions for both companies without consulting the other directors or officers, satisfying factors 2 and 10 [pervasive control and nonfunctioning of officers and directors];” that he “used [Curran Management] and [InnSeason] to fund other Curran-related entities, his personal interests, and family expenses, satisfying factors 5, 9, and 11 [nonobservance of corporate formalities, siphoning away of corporate assets by the dominant shareholder, and the use of the corporation for transactions of the dominant shareholders].” He found that “[s]ome [Curran Management] business records were carelessly kept, and the company was undercapitalized because it was funded by debt provided by Curran and [InnSeason],” satisfying both factors 4 and 6 (thin capitalization and the absence of corporate records); and, finally, he concluded that factors 3, 5, and 9 (the confused intermingling of business activity, assets, or management, the nonobservance of corporate formality, and the siphoning away of corporate assets by the dominant shareholders) were “satisfied by Curran's use of his pervasive control to move assets from [InnSeason] to other Curran-related entities by creating inter-company loans, deciding which of those loans were paid, and setting fees charged for inter-company services.”

Based on the weighing of these factors, the judge concluded that piercing the corporate veil “is necessary to prevent the inequitable and unjust result of [Atlantic Resort]’s inability to collect the underlying judgment from [Curran Management].” The judge consequently found Curran individually liable for the underlying judgment and accrued interest through application of the equitable remedy of corporate veil piercing. Curran, individually, now appeals.

Discussion. Curran argues first that veil piercing is never a permissible remedy in the absence of fraud. He correctly notes that the judge made no finding of fraud in this case.

Although fraud may of course lead to corporate veil piercing, it has never been a sine qua non of that form of relief. Rather, as the Supreme Judicial Court said as long ago as 1937, the exceptional remedy of veil piercing is available when necessary “to prevent fraud or injustice through the use of corporate forms” (emphasis added). Hanson v. Bradley, 298 Mass. 371, 379-380 (1937). Similarly, in My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968), the court spoke about the availability of the remedy when “there is some fraudulent or injurious consequence of the intercorporate relationship” (emphasis added). That fraud is not an essential prerequisite for this equitable remedy is made clear as well by Evans, 30 Mass. App. Ct. at 733, where “use of the corporation in promoting fraud” is listed merely as one of the twelve factors to be considered in determining whether circumstances warrant piercing of the corporate veil. If, as in this case, a judge weighing the Evans factors concludes that piercing the corporate veil is otherwise appropriate, the absence of fraud, standing alone, does not render that decision erroneous.

Next, Curran argues that Atlantic Resort suffered no injurious consequence from the lien given to Resorts Funding on InnSeason's assets. This amounts to an attempt to relitigate the question whether the lien deprived Atlantic Resort of an adequate remedy at law. That question, however, was resolved by a panel of this court in the prior appeal. Its conclusion on the matter is “the law of the case,” by which the panel is bound. King v. Driscoll, 424 Mass. 1, 7-8 (1996).

Finally, Curran argues that piercing the corporate veil is permissible only when the wrongful use of the corporate form caused the circumstances requiring the equitable remedy in the case, and that such causation is absent here. Curran contends that “the cornerstone” of the judge's order was an erroneous finding that Atlantic Resort had established, to quote the judge, “the existence of the [two loan agreements] between several Curran-related entities which are not parties to this action, including Resort Funding, LLC.” Curran observes that Resorts Funding is not a Curran-controlled entity, but apparently a bona fide lender of $40,000,000 to Curran-related entities, that the provision of a security interest to Resorts Funding in InnSeason's assets was, therefore, not a sham transaction, and that, therefore, InnSeason's inability to pay the judgment in this case was not caused by a wrongful use of the corporate form by InnSeason or Curran.

To begin with, we will accept arguendo the major premise of Curran's argument, which is that corporate veil-piercing is appropriate only where the misuse of the corporate form caused the corporate defendant's inability to pay. There is an argument that the equitable remedy is available to prevent the use of the corporate form as a shield to liability by those who have disregarded that form when it was to their benefit, regardless of causation of the inability to pay. See, e.g., Laborers’ Pension Fund v. Lay-Com, Inc., 580 F.3d 602, 610 (7th Cir. 2009) (“The point is to prevent those who disregard the corporate form from then relying on it to avoid liability for their wrongdoing”). But we need not resolve the question here.

Next, we agree with Curran that the judge erred in describing Resorts Funding as a Curran-controlled entity. It appears to be a separate legal entity with a genuine business relationship with Curran and some of the entities he controls. Atlantic Resort suggests that, despite this, the security agreement reflects a corrupt bargain designed merely to avoid paying the judgment against InnSeason. But we may assume, again without deciding, it is a legitimate contract, including the assumption that there genuinely was a default under the relevant hypothecation agreement or agreements -- although Atlantic Resort argues that the entry of judgment was not, in fact, a default under either of those agreements.⁴

Nonetheless, Curran's argument fails because the facts belie its minor premise, which is that in these circumstances, the inability to pay was not caused by its misuse of the corporate form. The relevance of the security agreement is not that it memorialized a sham transaction between Curran entities, but that it was a use of InnSeason's assets to benefit Curran personally as well as other entities he controls, and it was that misuse of the corporate form that rendered Atlantic Resort without an adequate remedy at law.

Under the agreements, Resorts Funding's loans were made to “Curran-related entities which are not parties to this action.” InnSeason was not a borrower. The collateral under the loan agreements was assets of the borrowers, not of InnSeason. InnSeason was merely one of the guarantors of the loan, the other two being Curran himself and Dennis Ducharme, an officer and director of InnSeason.⁵ This guaranty obligation arose from the guaranty and subordination agreement (guaranty), which InnSeason entered into the same day that the third amended and restated hypothecation loan agreement was signed, and it states that the liability created under the guaranty is joint and several with the guaranty of Curran and Ducharme. As guarantor, InnSeason guaranteed “[t]he payment of all sums at any time owed by Borrower under [the Loan Agreements] as and when the same shall become due and payable, whether at maturity, by acceleration or otherwise.” The guaranty was reaffirmed in the fifth ratification and confirmation of guaranty, signed in conjunction with the fifth amended and restated hypothecation loan agreement.

Under the loan agreements, in some circumstances -- and again we are assuming these include the entry of judgment against InnSeason in this case -- an entry of a judgment over $10,000 against any borrower or guarantor is, after forty-five days without discharge in full or a stay, an event of default. But, again assuming without deciding there was a default, the lien that now encumbers InnSeason's assets did not come into existence by operation of law. The loan agreements do not specify the creation of a lien. Rather, the loan agreements specify a variety of steps that the lender may take against the borrower entities in the event of default, including acceleration of the loan and foreclosing upon their collateral in the event of a default. If the collateral was insufficient to cover the debt, Resorts Funding could have sought the balance from the guarantors, including not only InnSeason, but Curran himself. Curran and his debtor entities were thus put at risk by the default.

According to recitations in the security agreement, in order to prevent Resorts Funding from taking such steps, Curran, acting on behalf of InnSeason and himself, as well as Ducharme, entered into the “Security and Reaffirmation Agreement” with Resorts Funding. This security agreement, signed thirty-two days after the entry of judgment against Atlantic Resort, gave Resorts Funding a secured interest in InnSeason's assets, but it gave Resorts Funding no security interest in the assets of either of the other guarantors, Curran or Ducharme. The agreement specified that both the “Borrowers and the Guarantors have requested that [Resorts Funding] waive the Existing Event of Default. [Resorts Funding], as a condition to waiving the Existing Event of Default, has required that [InnSeason] and the other Guarantors enter into this Agreement. The Guarantors acknowledge and agree that their execution and delivery of this Agreement and their performance of the covenants contained herein are material inducements for [Resorts Funding's] agreement to waive the Existing Event of Default.” The agreement goes on to state that “[InnSeason] hereby gives, grants and assigns to [Resorts Funding] a first priority lien and security interest in and against any and all of [InnSeason]’s right, title and interest in and to [InnSeason's assets].”

As described, then, the agreement did not provide a security interest in the assets of the other guarantors, including Curran himself, nor did it require anything of the borrowing Curran-related entities. Yet it did benefit those entities by preventing foreclosure, and protected Curran himself from liability he would have faced had the default resulted in foreclosure and the collateral of the borrowers been insufficient to cover the full amount of the loan.

It was this very use by Curran of InnSeason's assets to provide benefits to himself and his other entities that led to Atlantic Resort's inability to collect its judgment against InnSeason. See Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 16 (1st Cir. 1985) (“shareholders may be held liable where they control the operation of the corporation and run it for their personal benefit, and where justice requires that the separate existence of the corporation be ignored”). The identity of the lender, Resorts Funding, is immaterial. It is the provision of the security interest in all its assets by InnSeason alone, in order to protect not only its own, but the interests of Curran and the other Curran entities, that support the judge's conclusion that “[c]onsidering the totality of the [Evans] factors, this court finds that piercing the corporate veil between [Curran Management], [InnSeason], and Curran, individually, is necessary to prevent the inequitable and unjust result of [Atlantic Resort]’s inability to collect the underlying judgment from [Curran Management].” That use of InnSeason's corporate assets and only InnSeason's corporate assets to benefit Curran individually was precisely the cause of the injury to Atlantic Resorts.

Amended judgment affirmed.

FOOTNOTES

3.   See Atlantic Resort Dev., L.P., vs. InnSeason Mgt., Inc., Mass. App. Ct., No. 18-P-0985 (May 10, 2019). In the prior appeal, Atlantic Resort brought an action against William Curran and two of his companies, Curran Management Services, Inc., and InnSeason Management, Inc., to collect on a judgment entered against Curran Management Services, Inc.

4.   Atlantic Resort points out that default is defined to include not mere entry of judgment, but entry of judgment that is not discharged in full or stayed within forty-five days after issuance or filing. It argues that InnSeason filed a notice of appeal within forty-five days, which automatically stayed the judgment, and therefore, there was no default.

5.   Some of the documents also list Curran Management as a guarantor. We need not determine for present purposes whether it was or is a guarantor of the loans as it is not material to our decision.